You may have gotten through this series and thought, “What if I have no equity? What if I’m underwater or have an upside down mortgage?” In this article, we’ll outline 6 solutions you can pursue today, so don’t give up hope yet!
Negative equity, an under water mortgage, and being upside-down all mean the same thing when it comes to a mortgage. Erica buys a home in January for $200,000. Erica has made steady payments over the course of the year, but many people left town due to unemployment.
Crime increases and property values plummet. Erica is now paying a $200,000 mortgage on a house that would only sell for $90,000. This scenario happens more than you think (google search for “Atlantic City Housing Market”).
The biggest impacts of negative equity are the limiting factors. A homeowner usually takes a loss if more is owed on the home than its worth. They’ll also have a hard time refinancing. Negative equity is manageable unless you’ve got a compounding point of financial distress that causes you to fall behind.
1. Dig In and Keep Paying
The first option to battle negative equity is to stay in the house and keep making the monthly payment until it turns into positive equity. If there’s no need to sell, hold on to your property and wait out the market.
With time and the housing market readjusting, you’ll eventually pay down enough of the principal for the balance due to go below what your house is worth. While you’re in the house you can do things to increase its value like maintain it and make improvements.
Another quick way to increase equity is to make extra loan payments. If you can afford it, this will pay down the interest and principal quicker. Does the house have an extra room or living space? You may consider becoming a landlord. Incoming rents typically cover mortgage costs, and this may be a way to speed up the equity-building process.
The second method of dealing with an upside-down mortgage is to refinance your mortgage. “Don’t I require equity to refinance?” Yes. In most traditional refinancing situations, you need equity in order to take cash out, get a home equity line of credit or a loan.
There are programs that cater to qualified upside-down homeowners. If your mortgage is serviced by Freddie Mac and you’re still up-to-date on your payments, you may qualify for their Enhanced Relief Refinance Mortgage. This program replaced the Home Affordable Refinance Program, or HARP, program that was providing relief after the 2008 housing crash.
For mortgages held by Fannie Mae, they offer a High LTV Refinance Option, but as of the time of this writing, it’s been temporarily paused. Note: With negative equity, you won’t be able to get a cash out refinance.
3. Short Sale
The third option available to underwater property owners is selling your home through the short sale process. A straight sale or cash offer aren’t very effective in this scenario. Through a short sale, mortgage lenders allow the property to be sold for less than the amount owed.
Important things to note about a short sale are that you need to have an offer in place for a lender to consider the amount. Secondly, a short sale will show up on your credit report, and you may have time restrictions before you can buy a home again. Lastly, short sales can be complex, so you may want to work with a broker or agent who really specializes in Short Sales and handling lender negotiations and paperwork.
A web search on how to deal with negative or low equity real estate, some advice will tell you to walk away from your home via “strategic default” or allow the foreclosure, process but this series is called How to Save a House, not how to lose it badly . Before any of these steps, the absolute first to take is to communicate with a lender and see what options are available for your specific situation.
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